What Now for Brokerage Accounts in 401(k)s?

Published on May 4, 2016

Now that the Department of Labor has released their fiduciary regulations (DOL fact sheet), everyone across the 401(k) landscape is working to digest the impact. The new rules are being phased in beginning in April of 2017 with full compliance required by January 1, 2018.  At that point, anyone providing retirement investment advice to 401(k) plans or IRAs has to abide by a fiduciary standard.

Even before the final regulations were released in April, a major broker dealer announced in January that all 401(k) plans currently using them for self-directed brokerage accounts will need to move to an approved record-keeping platform by September. This announcement is expected to impact more than 6,000 retirement plans.

One of the big questions on people's mind is whether other broker dealers will implement similar restrictions. It’s tough to say. But, in the meantime, it’s important to determine your next steps. So, take time to consider what might be behind the shift and how you can assist clients effected by this announcement. 

The Root Cause

The root cause seems to be a combination of the DOL’s fiduciary regulations released recently and plan sponsors' responsibility to monitor the plan under 404(c), and comply with 408(b)(2), and 404(a)5. (For more details see our “Dig Deeper” information below.)

Secondly, in light of this recent trend, we’ve created a one-page outline of the suggested process you might follow to assist clients and manage this opportunity. Download our step-by-step guide to help you get started. 

Dig Deeper

A basic explanation of 404(c), 408(b)(2), and 404(a)(5) is that a plan sponsor is responsible to monitor the plan and disclose fees to participants.  

Impact of 404(c): 404(c) offers protection to plan sponsors and the investments they offer in the plan, but requires the plan sponsor monitor the investments. When the retirement plan is setup using individual brokerage accounts, it can be argued that it is more difficult for the plan sponsor to monitor individual participant accounts. While there are proponents on both sides of the argument, it might be easier for some plan sponsors to monitor a single “platform” of investments.

 Impact of 408(b)(2), and 404(a)(5): 408(b)(2), and 404(a)(5) have an impact on this recent trend as well. 408(b)(2) requires the plan sponsor of a retirement plan monitors fees paid to service providers to make sure they are fair and reasonable. 404(a)(5) requires disclosure of fees and expenses to participants. That said, it’s helpful to understand the fee disclosure requirements for brokerage accounts is less expansive than fee disclosure requirements for plans using a accounts under a recordkeeping platform. Therefore, it’s important to recognize fee disclosure is playing a role in this shift.